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Whipsaw Wednesday

During the week of an option expiration the Wednesday of that week is usually very volatile and choppy. Often this week we see a lot of games played in the options market by the large institutions. The large institutions will often sniff out where the small retail options trader has placed his bet and they will often take the market away from that popular strike price. Therefore, the Wednesday before options expiration is full of whipsaw, therefore, is important to be prepared for anything. 

This morning Target Corp (NYSE:TGT) and Deere & Co (NYSE:DE) both reported earning and are trading lower on the session so far. While the earnings were not bad for these companies the street was looking for little more. As we traders say, the market already had that news baked into the cake. 

Generally, after a large point move like we saw yesterday in the market it will usually pause or consolidate before trying to push higher. That could be the case today. However, yesterday the major indexes did decline sharply at the end of the session. This tells us that the institutions may have taken care of a lot of options expiration business in that final hour. Keep an eye on the leading stocks today such as Exxon Mobil Corp (NYSE:XOM), and Goldman Sachs Group Inc (NYSE:GS). When these stock decline the stock market is usually weak. The opposite is true when these stock rally as the overall market will usually catch a bid higher.

On the Wednesday before options expiration it is important to remember that the major indexes are usually very volatile and choppy. This is often the day when many small retail options traders will close out options positions. Remember it is very rare that the small retail options trader will ever actually exercise their options trade. 

Nicholas Santiago
Chief Market Strategist